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Monday, December 2, 2013

Singapore Developers 2014: Shift towards home oversupply begins (BNP)

Singapore Developers -
2014: Shift towards home oversupply begins

n The shift towards oversupply has begun
We are turning more cautious on the Singapore residential market given oversupply risk. We expect the era of supply shortage to end by 2015, with pent-up demand easing and completed supply set to reach record high levels in the coming two to three years.

Unsold inventory has been rising since 3Q13 as developers race to launch products ahead of home price weakness. Home demand growth has been declining since its peak in 2012 due to credit tightening and other restrictions from the seven cooling measures. Looking into 2014-15, we expect demand growth to stay under pressure due to potential interest rate increases and slower economic and population growth.

n Margin squeeze from higher land cost

Near term, developers are facing a margin squeeze from lower home prices and higher land costs. Competition for land is intense, driven by restocking needs, strategic bidding practices (eg, to protect existing sites), and new players entering the land market. Based on our land market analysis, land costs for developers in the sector accounted for 57% of development costs in 2013 on average, up from 46% in 2008. We estimate sector net margins could fall from c24% in 2012 to c10% in 2013/14, assuming launch prices stay flat. The overheated land market is forcing out local developers that are finding it difficult to restock land. Their success rate in winning sites has fallen from 23% in 2010 to 11% in 2013. This could slow developers’ earnings momentum.

n We expect home prices to fall 15% by 2015; REDUCE CIT, BUY CAPL We expect new home volumes to fall 28% in 2013, and another 7% by 2015. With volumes typically leading prices, we expect home prices to fall 15% by 2015 (we previously forecast a fall of 10%), as unsold inventory rises. To reflect our new home price assumptions, we cut our estimates for FY14-15 EPS by 6-10% and RNAV by 2-6%, and cut our TPs by 9% on average. Stock prices also tend to lead home prices. We believe home prices will peak in 2013 and then fall. We downgrade CIT to REDUCE (from Hold) given its proxy status and large exposure to the Singapore residential market. We downgrade KPLD to HOLD (from Buy) given recent outperformance. We maintain CAPL at BUY, given trough valuations, and FNN at HOLD. We still favour Singapore developers with entrenched and diversified overseas exposure, along with asset recycling opportunities.

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